Good day. Welcome to the Kering 2014 first half results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jean-François Palus, general manager. Please go ahead, sir.
Good evening to all of you. I'm Jean-François Palus, Kering Group Managing Director. I'm pleased to welcome you to this call. I will give you a brief overview of our first half 2014 results. Jean-Marc Duplaix, our CFO, will run you through our numbers in greater detail. Before we answer any questions you may have on our performance in the first half, I'll share with you our views on where we stand as we enter the second half of the year, as well as some background on the acquisition announcement we also made this evening. Let's go directly to slide four, where we have summarized our key readings on the first half.
In the middle of a major brand repositioning exercise at Gucci and a root and branch turnaround at Puma, two of our largest units, Kering achieved a 4% increase in comparable sales, improved gross margin by more than one percentage point, and maintained a high level of operating profitability despite unfavorable currency trends. I would like to point out here that adjusted for currency changes, our EBIT growth was far ahead of the increase in sales with a material increase in margin at each of our luxury brands at constant currency. These performances underscore the soundness of the strategy we have been implementing for over a decade as we built an ensemble of complementary brands with different levels of maturity.
The outstanding performances of our high-growth luxury brands, notably Bottega Veneta and Saint Laurent, more than compensated for the softer momentum at Gucci in the period, as we raised the exclusivity of the brand in terms of both product offering and distribution. In this regard, the 10% jump in total retail sales from our luxury operations is a telling number. The further increase in operating profit of our luxury activities in the face of considerable investments in our brand's positioning and future growth is another testimony to their inherent strength. In sport and lifestyle, we are seeing the first positive signs of Puma's turnaround at the top-line level. Our other brands are consolidating their positions and gaining market share. As Puma's relaunch gains momentum in the second half, we are confident that these trends will solidify. The order books Puma is building for the coming quarters comfort our expectations.
Operating profitability of the sport and lifestyle activities was severely impacted by the adverse foreign currency environment, exacerbating the impact of our investments in its future. Around half of the operating income decrease is attributable to negative currency effect. Finally, the first half of 2014 marks the definitive chapter in Kering's transformation into a pure luxury and sport and lifestyle company. Our discontinued operations numbers and the group's net income show the impact of this move. This is it. We do not expect any further material impact on our numbers from our move away from retail businesses, and we can now focus all our attention and all our energies on the prosperity of our core activities. We are thankful for the support of our shareholders and other stakeholders throughout this fundamental transformation process, which puts us in a strong position for growth and profitability.
Slide five provides you with a summary in table form of everything I just mentioned, together with the main drivers of these numbers, and with an introduction to Jean-Marc's drill down of our first half performance. The strength and balance of our luxury businesses is clearly visible with sound sales growth and solid profitability generated by our high-growth brands. In the meantime, while undergoing an in-depth repositioning, Gucci's operating profitability is resilient. At this interim stage, we consider these performances promising. Our high-growth brands are delivering according to plan, indeed better than plan, and we are seeing very encouraging signs in the activities we are repositioning for the future. I will now pass the phone to Jean-Marc for a comprehensive review of the first half numbers.
Thank you, Jean-François, and good evening to all of you. All the sales figures and comments I will make are based on comparable scope and exchange rates. As a reminder, Pomellato Group was consolidated as of July 1st, 2013. Let me start with our performance in luxury on slide seven. In the first half, Kering's luxury activities posted an increase in sales of nearly 6%, driven by solid retail revenues, up 10%. This is slightly higher than the retail trends achieved in either the first or the second half of last year. The pace of growth in retail slowed down in the second quarter to 7%. This deceleration is mostly attributable to the reversion of VAT hike anticipation in Japan. Looking at the underlying trend of the first half rather than at the quarters probably makes more sense than ever this year.
You will also notice that the growth in retail of our activities has been extremely consistent over the past 18 months. By region, mature markets were solid contributors to growth in the first half, up 11% in retail. This was driven by strong trends in Japan, up 20% over the period, and by North America, up 12%. North America picked up in the second quarter after the tough weather conditions of the first quarter. Conversely, retail sales in Japan were up 2% in the second quarter after a nudged bit first quarter for the VAT reason you know. Growth in retail sales was only marginally lower in emerging markets, up 9% in the first half. I'll come back on this in more details in a few minutes when commenting on each brand.
As far as wholesale is concerned, the 3% decrease once again reflects our strategic move toward increased direct distribution, particularly at Gucci, as I will elaborate later. Overall, for our luxury activities, the share of retail is 69% of the total in the first half of 2014 as compared to 67% in the comparable period last year. In the first half, Kering's luxury activities posted another increase in operating profit, up 1% reported and up 9% in constant currency. This improvement is driven by the increased contribution of Bottega Veneta, Saint Laurent, and our other brands with a combined EBIT up 16% to EUR 271 million in the first half. Together, they now represent more than one-third of the EBIT of our luxury activities.
Following a year of strong investments in 2013, we have reached a comfortable CapEx level, allowing us to fully nurture each brand's development and to prioritize our investments where they are most effective. Store investments account for the bulk of our CapEx, around 75% of the total. They are well-balanced between store openings on the one hand, extension and refurbishments on the other. The luxury activities added a net of 20 directly operated stores in the first half, with 55 openings and 35 closings. This illustrates our commitment to constantly fine-tune our store network and to concentrate on the best locations. At the end of June, the total store count was 1,169. Let's look at Gucci on slide eight. Over the first half, Gucci posted a satisfactory retail performance up 3%.
This reflects contrasted market situations depending on the stage of implementation of our brand strategy as well as on diverging macro trends. By region, first-half retail sales were very dynamic in both Japan and North America, respectively up 17% and 7%. As expected, Japan decelerated following VAT purchase anticipation in late March, resulting in flat sales in the second quarter. By contrast, retail in North America at plus 10% in the second quarter accelerated materially after a first quarter affected by the weather. Retail performances in Western Europe remained soft, with mixed trends in local spending, together with some pressure on tourism flow from Russia, but also China. In Asia Pacific, the challenging environment of the first half, especially in Hong Kong, Singapore, and Taiwan, came on top of the brand elevation implementation.
In mainland China, trends in the second quarter were similar to the first quarter, and Hong Kong was soft as we had already stated previously. Singapore, for its part, further deteriorated, leading to the sales declines in Southeast Asia. As expected, wholesale was down 16% in the first half, reflecting Gucci's continuing shift towards direct controlled stores. The decline was less acute in the second quarter, down 12%. Going forward in the second half, this trend should gradually normalize, excluding any additional buyback opportunities. In the first half, retail sales represented nearly 80% of Gucci revenues from just over 70% if we look back to 2009. Distribution is one of the pillars of our elevation strategy. Product assortment is another.
To illustrate this point, I invite you to move to slide nine, which provides an overview on where Gucci comes from and where the brand now stands with specific regard to the handbag category. Handbags account for one third of Gucci sales. You will see that entry price products now represent just 2% of the category revenue worldwide, down from 32% five years ago. Handbags constitute the category in which we have made the most progress across all markets and where we are closest to where we want to drive the brand. The results are probing, especially in Japan, where the brand is fully in sync with its clientele, and in North America, where the brand ramp-up is solidly on track. The concentration on core handbag segments explains the growth in revenue, partly driven by average unit retail price over the period.
Thanks to new lines like Swing and Bright Diamanté, Gucci's most recent launch that you will see later on slide 10, we are steadily expanding the offer in this core segment, enlarging the carryover base in no logo leather lines. The new series have been very well received, and we expect them to become significant contributors to revenue growth. Combined with our ongoing efforts to further enhance our retail excellence across the network, these new handbags will definitely strengthen Gucci's competitive position when end demand and traffic, notably in Asia, pick up strength again. In other leather goods categories, we have not yet reached the same level of brand elevation. This is the case in luggage, for example, but also in small leather goods where Gucci proposes an opportunity for more aspirational clients to access the brand.
In the first half, Gucci posted another increase in gross margin, driven by both product and channel mix improvements. Part of this additional contribution was selectively reinvested while we maintain stringent discipline in key areas such as store expenses. Consequently, Gucci's EBIT margin was nearly in line with the first half of 2013 and was even slightly ahead of last year at constant currency. This is an achievement and demonstrates Gucci's ability to actively manage its cost base while implementing a virtuous upscaling of its product positioning. As of June the 30th, Gucci operated 480 stores. Operating investments were broadly stable compared to last year, with more emphasis on refurbishments, enlargements, and relocations to consolidate and enhance the overall in-store experience across the network. Moving to slide 11, Bottega Veneta posted another semester of sustained growth across all main regions and distribution channels.
Sales in the first half were up nearly 18%, 18%, accelerating in the second quarter, up 20%, with further growth in the mid-teens in retail, broadly aligned with the trend of the past few quarters. Wholesale was also outstanding in Q2, posting growth in excess of 45%. This performance reflects both strong demand for the fall/winter 2014/15 collections from key buyers and a more efficient production and delivery flow, further highlighting the brand's ongoing commitment to best-in-class operations. By region, all main markets witnessed double-digit growth in retail throughout the first half. Looking to the second quarter alone, retail performances remained extremely positive in Japan, up a solid 9% after an increase of 42% in the previous quarter. Other mature markets accelerated during the second quarter, with North America fueled by solid growth of both local and tourist clients.
In Asia Pacific, retail sales growth in the high teens was consistent in both quarters. All main product categories enjoyed very sound growth. Leather goods maintained the momentum during both Q1 and Q2, while other categories posted firm increases in sales, led notably by men's lines. The solid top-line performance of the first half resulted in further double-digit growth in EBIT. Bottega Veneta's reported EBIT margin remained at a very high 31%, 50 basis points lower than in H1 last year. This slight dilution will not come as a surprise to you, given the high level of operating investments in store openings and new product categories in order to support Bottega Veneta's long-term strategic ambitions. Let's now quickly comment on operating investments. Just to remind you that the headline CapEx decrease primarily stems from a very high comparison base.
In H1 2013, Bottega Veneta's CapEx had tripled, given preparations for the opening of the Montebello Vicentino atelier and Milan Maison, both of which opened in H2 last year. Leaving this factor aside, Bottega Veneta's investment program in the first half this year was again sustained. Six stores were opened in the period, of which four in Western Europe, where the brand still has a largely untapped potential, bringing the aggregate store count to 227 units as of June 30th. Flipping over to slide 12, let's now look at Saint Laurent's performance in the first half, the period during which sales jumped by 28%. Retail sales were outstanding, showing a growth of 56%. Trends in the six months confirm that the significant retail investments of the past year, both in terms of store openings and refurbishments, are paying off.
As a consequence, retail sales represented 62% of the brand's sales during the period, more than 10 percentage points above last year. Wholesale, for its part, was roughly flat in the first half. This reflects the different timing of deliveries of the cruise and spring/summer collections this year compared to last year. Leaving that aside, wholesale registered solid double-digit growth in the second quarter, better indicating the brand's momentum with buyers. Briefly commenting on retail sales by region, Saint Laurent posted extremely solid growth rates across the board, with all main markets posting high double-digit sales performances in both quarters alike. This confirms once again how strongly Saint Laurent's renewal is resonating, be it in Western Europe, its main and historical market, or in newer markets such as Asia-Pacific, where the brand's potential is extremely promising.
All product categories enjoyed very solid growth, fueled once again by the success of some of the handbag lines introduced over the past 12 months or so, such as Sac de Jour and Monogram. The Monogram lines, in particular, were enriched in the second quarter by the introduction of additional shapes and functions, all of which were very well-received. Sales of ready-to-wear grew solidly in excess of 40% in retail, further propelled by the significant investments carried out in the men's line. In the first half, Saint Laurent's operating profit rose in excess of 50%, translating into a further 200 basis point improvement in the brand's EBIT margin. This sharp jump in profitability is driven by further growth margin gains as Saint Laurent tightens its control over distribution and improves its share of full price sales.
It also comes from a positive operating leverage now that the couture business has reached a greater scale. Considering the momentum of the brand, the overall CapEx budget has been kept at a high level above 7% of sales, reflecting the selective expansion of the retail network with nine openings and seven closures in the first half. The sizable part of the retail store CapEx was also devoted to refurbishments in line with the plan to upgrade the retail network initiated last year. Moving on to slide 13, our other Luxury brands altogether posted revenue growth of close to 7% in the half year, driven by retail sales up 12%. In line with earlier periods, trends in Soft Luxury benefited from the outstanding performances of Alexander McQueen and Stella McCartney, further confirmed in the second quarter up double digits.
Sales at Balenciaga were especially sustained in retail, showing some acceleration in the second quarter as all key regions saw double-digit retail growth, with North America leading the way. Brioni, for its part, had a very satisfactory retail performance in Japan and North America. This was partly offset by the brand's exposure to the Russian clientele, which dragged down Western and Eastern Europe revenues. In Hard Luxury, trends remained uneven, although generally positive over the combined first and second quarters. At Boucheron, for instance, the very solid first quarter was partially reversed in the second quarter in Japan, the brand's second-largest market, due to important anticipations of bridal jewelry purchases ahead of April the 1st. Pomellato and Dodo enjoyed positive trends in the first half.
This was achieved at times where both brands have been enhancing their product offer and distribution while proving resilient in Western Europe together with sustained performance in Japan and Asia Pacific. Girard-Perregaux, for its part, had satisfactory sales in the first half, even if the change in distribution in Asia Pacific requires some time to reach cruising speed. In the first half, operating profit of our other luxury brands grew by 12%, with satisfactory performances across the larger soft luxury brands while we are still investing in the younger brands such as Christopher Kane and Kilian. Conversely, the results of Girard-Perregaux were impacted by some charges related to the transition in its distribution, whereas Sergio Rossi's results were not aligned with our expectations.
In summary, let me remind you that Kering is actively managing a multi-brand portfolio strategy based on the constant pursuit of profitable growth with targeted investments adapted to each brand's life cycle within a broadly stable CapEx budget. With slide 14, let's move on to sport and lifestyle, which demonstrated a more promising sales performance during the first half, with encouraging signs in the order books ahead of Puma's brand relaunch. I will not elaborate on Puma following its announcement yesterday, just recapping the main takeaways of the first half. Over the period, Puma's revenues stabilized with improved and positive revenue growth during the second quarter, up nearly 1%. By distribution channel, while wholesale sales were essentially flat in the first and second quarters alike, retail revenues picked up materially with good levels of growth also on a like-for-like basis in Q2. By geography, sales remain contrasted.
North America enjoyed solid trends, accelerating in the second quarter at 4%, driven by apparel and accessories. Brand awareness in this market benefited from the Puma Lab at Foot Locker initiative launched in Q1. In contrast, Western Europe remained slightly negative, with good performances in the U.K. and Spain not offsetting softer trading, notably in France. The emerging markets, accounting for nearly 37% of Puma sales, achieved positive sales in the second quarter, lifted by Latin America, Turkey, and Asia-Pacific, excluding Japan, partly mitigated by lower sales in Eastern Europe. Trends by product category did not change materially in the first half. While footwear sales remained negative, accessories and apparel continued to drive growth. Overall, Puma's sales performance in the first half further reinforces our confidence that the brand is gradually regaining traction, notably thanks to its renewed focus on sport and performance.
For instance, all the product initiatives around football with the launch of highly innovative boots earlier in the year, such as evoPOWER, helped generate strong brand visibility during the World Cup. This is providing a solid platform ahead of the Arsenal kit launch in July and Forever Faster advertising campaign due this August in time for the back-to-school season. As these initiatives gain momentum, and the order book for the fall/winter 2014 season due to be shipped during Q3 build nicely, we are convinced that Puma's turnaround is well on track. Our other sport and lifestyle brands also posted satisfactory revenue performances throughout the period. At Volcom, sales accelerated in the second quarter, up nearly 6%, supported by a solid retail channel. Wholesale revenues also improved, triggering further market share gains, particularly in North America.
Electric had a good first half with a brand refocus on sunglasses and accessories such as watches now starting to pay off. Sport and lifestyle operating income decreased in the period. This is a consequence of the very adverse top-line impact from FX at Puma, leading to a weaker absorption of fixed costs, along with the first incremental A&P investments to support Puma's relaunch, which will further accelerate in the second half. A number of key financial indicators are clearly heading in the right direction. In particular, gross profit margin at Puma is stable in the first half, with an improvement in the second quarter. Now moving on to the remaining lines of the P&L summarized here on slide 16. Other non-recurring operating income and expenses amounted to a loss of EUR 8 million. It encompasses an impairment charge on Volcom's goodwill.
This non-cash impact is compensated by a capital gain on the sale of a real estate asset in N.Y. that was not dedicated to our retail operations. We considered that the market value of this building had reached an interesting level for us to monetize it. Net financial charges amounted to EUR 105 million. Within this, the cost of net financial debt was down slightly, reflecting two opposite effects. An increase in average debt position during the first half, more than compensated by the lower net cost of financing, thanks to active management of our debt profile and the recent issuance of new bonds bearing a much lower interest rate. The effective corporate tax rate amounted to 20.5% in the first half, with a recurring tax rate of 18.3%, broadly flat year-over-year. Just a word on net income.
As anticipated, we posted an additional loss stemming from discontinued operations for a total amount of EUR 348 million. After this, you should not expect any more material impact on this line. As of the end of June, this loss included the balance of the cost related to the disposal of La Redoute, namely the personal measures that we had committed to finance and the anticipation of the cost related to the disposal of two small remaining Redcats assets, which should be completed by year-end. Consolidated net income is up 5% with a slight decrease when adjusted from non-recurring items and discontinued operations. Let's now have a quick look at slide 17, which highlights the evolution of our free cash flow from operations. Our free cash flow improved to more than EUR 600 million, including the positive cash impact of the real estate sale I mentioned.
Looking at cash flow generation, it's slightly higher than last year at EUR 930 million. Our CapEx has also been maintained at a level similar to last year, representing a cash outflow of EUR 215 million in the first half. We had started last year to refocus our actions plan on organic growth across most brands, leading us to stabilize the size of the overall CapEx budget. This has a virtuous effect on free cash flow generation and will of course be a key driver to control OpEx growth. The main difference in cash generation comes from working capital, with the improvement at Puma not compensating for higher cash use in luxury activities. This increase primarily reflects the full impact of the store network expansion of the past 12 months, especially across the fastest-growing brands, notably Saint Laurent and Bottega Veneta.
Now on slide 18, you will find the change in our net financial position during the period. In the first half, net financial debt increased compared to December last year. This is due to usual seasonality patterns, including dividend payments in the first half, which this year represented a cash outflow of EUR 500 million. The increase in net debt is essentially the consequence of the cash outflows stemming from the Redcats asset disposal, which, as you know, includes the balance of the recapitalization of La Redoute accounted for in the second half of last year, as well as the full impact from the personnel measures previously announced. This ends my remarks. Let me now pass the phone back to Jean-François before we take your questions.
Thank you, Jean-Marc. Let's turn to slide 20, where we have summarized our priorities and views for the balance of this year. In luxury, we believe that the tougher environment on the economic and currency fronts will continue to impact our performance. In this context, we are confident that Gucci will return to revenue growth in the second half, and we anticipate further positive trends at our other brands. Our focus remains squarely on cash flow generation and on organic growth. This is probably the right place to make an aside on the acquisition of Ulysse Nardin that we have announced today.
While we have been clear that our absolute priority in sport and lifestyle is to turn around our existing brands, and while we are satisfied with our current stable of soft luxury brands, we have made no secret of our intention to further build up our watches and jewelry division. In this respect, Ulysse Nardin is a brand that has been on our radar screens for many years, and the opportunity has materialized very recently in an industry where the number of top-quality independent watchmakers is limited. Ulysse Nardin fits all the requisites we had identified, both on a standalone basis and as a strategic asset that can become the keystone of our presence in the watches segment. Indeed, this acquisition is a structuring development and will generate significant synergies with our existing assets.
Ulysse Nardin is a very strong brand, anchored in the marine universe, with a unique legacy dating back to 1846. It has consistently been one of the most innovative, independent manufacturers in the industry. The brand is a pioneer in the use of cutting-edge technologies and advanced materials, such as silicon in components. As such, Ulysse Nardin is self-reliant for all components, including movements and hairsprings, thanks to in-house production capacities, skills, and know-how built over time. It has a very consistent collection in the fastest-growing price segments. Ulysse Nardin's distribution network is another key asset of the brand, and will clearly provide a solid backbone for our existing activities. We estimate that as part of the group, Ulysse Nardin will be able to generate significant synergies within a few years.
The multiple we offered, a little more than 13 times EBITDA, is fair for a brand with such a rich heritage, high profitability, and growth prospects. We are looking forward to welcoming Ulysse Nardin as part of the group when the acquisition closes later this year. Following the acquisition of Ulysse Nardin, our net debt at year-end should be closer to two times EBITDA, the upper limit we had set up for ourselves to be able to seize a unique opportunity of this kind. Now that our transformation is complete, de-leveraging will once again become our top cash flow use. Turning back to sport and lifestyle, the next big milestone is the unveiling of Puma's Forever Faster campaign in August, and the arrival of new products in stores, which will mark the brand's official relaunch.
To conclude, we are operating in a more difficult environment than the one we thought we would face at the beginning of the year. We have the right strategy, and we are nimble and fast. This should enable us, regardless of the environment, to improve our operating performances in the second half of the year. We are now ready to take your questions.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key, followed by the digits one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will now take our first question from Thomas Chauvet of Citigroup. Please go ahead.
Good evening, Thomas Chauvet from Citi. I have three question, please. The first one on the acquisition of Ulysse Nardin. Could you perhaps share with us some indication around the turnover? The press industry sources suggest CHF 250 million of turnover, 27,000 pieces a year. Is that a fair assumption? What is the high profitability for you? And how will you integrate this brand within the watch and jewelry division that you have recently created? In particular, how is it gonna perhaps help Girard-Perregaux, which seems to be struggling for some time. The second question is on the comment you made, Jean-François, about the acceleration in Gucci trend in the second half. Can you elaborate a little bit about what you're seeing in July?
What indicators you have in the environment or company specific that give you confidence about a return to a more acceptable growth rate of maybe 5%-6% for Gucci from here? That would be very useful. Thirdly, in terms of the FX impact, it seems you've mitigated the FX impacts on profits well in the first half. If we look at today's spot rates and a lower euro, how should we think about FX in the second half? Can you give us also the hedge rate for the JPY and USD? And just if I may add, just for a housekeeping question on your cash flow, on page 10, can you just tell us what the big swing is with this other non-cash income and expenses of EUR 127 million, please? Thank you.
Good evening, Thomas. About Ulysse Nardin, we didn't disclose the turnover. We will not. But what I can say is that the assumption that you mentioned is quite sensible. So is the volume of watches that the brand is selling per year. The integration will be very simple
You know that now we have a division that is dedicated to watches and jewelry. Albert Bensoussan will take care very closely of the integration of Ulysse Nardin that will become the backbone of our watches business. Indeed, the integration of Ulysse Nardin will be quite beneficial to JeanRichard and Sowind in general, particularly on the manufacturing side. About the acceleration for Gucci in the second quarter, I confirm what I've just said. I think that Gucci will reach a growth that will be just below the growth rate you mentioned. As far as the month of July is concerned, we have seen a sequential improvement week after week. That's why we are quite confident with also a very good reception for the new collection and a good order book for wholesale for the pre-fall collection.
Good evening, Thomas. About your question about FX, just as a reminder, what we can say is that the combination of FX and hedging gains outcome is not, as you know, as favorable in H1 2014 as it was in H1 2013. For the full fiscal year, we will not make any comments so far, but we expect hedging to be much less favorable in H2 this year compared to last year, especially regarding the evolution of euro against other currencies in the last days. Of course, it may have a more favorable effect in terms of FX or on the sales. As regard your comment. Just as a reminder, still about the FX, is about the hedging we have for the second half. It's closest to the spot rate. Again, the hedging gain should be more limited during the second half.
About your question about the cash flow, you have a mixed effect, as you see, with some non-cash items corresponding mainly to the net gain on some sale of asset and also a variation on some deferred tax. This variation on the deferred tax, of course, is without impact on the cash.
The sale of asset, what asset are you referring to?
We have sold some assets. I'm not talking about the sale of the real estate building because it varies the cash impact in the semester. The cash impact of some refurbishments and also is the sale of some, the Kymane that we should receive in the coming months. The main effect is mainly the variation of deferred tax due to the different depreciation that we had in the semester.
Thank you.
We will now take our next question from Louise Singlehurst of Morgan Stanley. Please go ahead.
Hi. Good afternoon, gentlemen. Three questions from me too, please. In terms of the Gucci brand, just looking at the retail development over Q1 and Q2, obviously a very nice improvement in North America, if you can give us any color on that. For Asia, obviously, you and the peers have all been talking about a slowdown in Hong Kong and a tougher environment for Asia. Can you give us any reasons as to the rationale as to why that's happening, do you think, and how long you think this will persist, if there's any color on that? Secondly, if you could just talk about the margins at Gucci brand. Obviously nice control there with the FX, but in terms of any cost savings that have been implemented in the period. Finally, just on terms of the new products we should expect at Gucci brand.
You talked about the new bags and the encouraging signs you're seeing from the architecture. Is the architecture now where you want it to be? When we walk into the stores for fall-winter, would we start to see new selections coming through? Will it be quite obvious for us to pick out the new collections? Thanks.
Good evening, Louise. Concerning the improvement of Gucci in North America, I think it's totally consistent with the comments we made after the Q1. The Q1 had been particularly weak because of weather conditions, but as you will have noted with the release of the figures about the U.S. economy, the second quarter was quite strong across the board in main cities with probably less volatility in the past. Overall, the performance of Gucci division in the U.S., in the North America, was very positive, and at almost 10% in retail during the second quarter and probably with less impact of the decrease of the Japanese tourist in Hawaii. Concerning Asia, as we mentioned, quite a complicated for us to analyze and then to predict because we have much volatility on this market with very contrasting trends, country by country.
What we can say is that we have some improvements on some markets which were more difficult in the past, I think primarily to Korea, where there is an improvement, thanks also to the fact that we have more the control of the distribution since the take-back of the duty-free. I would add also that we see progressive improvement in mainland China and especially in Taiwan, thanks to the rationalization of the network in the country. It's still ongoing. Hong Kong is quite tough, and I think it was something that was mentioned already by our peers. Even if we saw an improvement during the second quarter, the trends are still quite difficult due to a low level of traffic and an average basket, which is rather low at this stage. There is a change also in terms of quality of the traffic.
Clearly what dragged down the performance over the period, and especially in the quarter, are Taiwan and Singapore, which are very difficult markets. Without Singapore and Taiwan, the performance of Gucci would be positive in retail in Asia. As concerns the trends for the coming months, I must say that it's, at this stage, very difficult to predict, and we don't see at this stage major signs of improvement. As regards the margin, what we can say is that we have lost 20 points of margin if you look at reported data, but you have an improvement in constant currency. It's mainly due to the size of Gucci.
We have a good absorption of the fixed cost, we have decided to have a tight control of the operating cost, except on the store expenses, where we believe that we must invest, and also in terms of communication, where we try to push also the communication around the new collections you mentioned. These are the lines where we have decided to increase. Otherwise, we have a tight policy of control of the cost. Going forward, we can anticipate that over the year, the trend we saw during the first half should be confirmed over the year as regard the EBIT profitability of Gucci. I just would add something about Asia concerning this situation I mentioned.
I think that considering the trend, we are very confident that having new managers on board in most Asian countries and soon in China, we could also address more properly this complex situation in Asia. Concerning the new products, handbags and women ready-to-wear were the categories where we did expect a strong improvement in the performance, thanks to the new fall-winter 2014 collection. As you know, we are talking of a gradual ramp-up for this new collection with the bulk of sales rather expected during H2. Swing line was the first to be delivered, representing a functional and industry leather bag. Bright Diamanté followed, reaching the stores with a wide mix of styles and started to sell as well.
At this stage, sales trends of the new collections are looking good, and we are very happy with the reception made by our clients and buyers to these novelties. To note that by comparing the Bright Diamanté vis-à-vis the now established Bamboo Shopper last year when it was introduced, we see that Bright Diamanté have performed very well, and now exceeding Bamboo Shopper in both quantity and value. Globally, just coming back to the slide I commented about the assortment of Gucci, what we can say is that in the handbags category, we are more or less satisfied now about where we stand in terms of share between logo, no logo, leather, and non-leather.
We have still some, of course, ramp-up to make in Asia Pacific, globally, in terms of merchandising for the handbag category representing one-third of the sale, we are very happy with the assortment we have.
Thank you. One follow-up. Just in terms of Western Europe, can you just tell us if there's any change in trends in Chinese spending? You talk about lower baskets or lower mix in Hong Kong. Are you seeing that in terms of spending behavior in Europe from the Chinese as well?
What we see first is, of course, the impact of the decline still of the Japanese tourist and the Russian tourist. It's fair to say that as regard the Chinese, we saw a slowdown in terms of sales to Chinese tourists, which is more an impact due to the traffic than on the average ticket.
Super. Thank you.
We will now take our next question from Luca Solca of Exane BNP Paribas. Please go ahead.
Yes. Hello, Luca Solca from Exane BNP Paribas. There seem to be quite a number of moving parts as far as Chinese tourists are concerned. They seem to be going more to Korea and Japan. They seem to be going less to Southeast Asia. There seem to be some softness in Europe. I wonder if you could help us understand these trends better by sharing what you see from your viewpoint and where you see Chinese tourists moving in this six months that just went by. As a second point, the Gucci repositioning is impressive. I wonder what your thinking is in the accessible price handbags, considering the very significant momentum of some of the peer brands operating in that space.
If you still have an ambition to play a role in that space, in the future, knowing that your brands, the brands you currently have in your portfolio, have moved largely out of that space. Maybe, if you could confirm, I seem to understand that you have now found a CEO for Gucci in China, and if you could confirm that this is the case and when he or she will be getting on board. Lastly, if I may, I would be interested in getting your latest thinking as far as the benefits and the positives of combining the luxury business and the lifestyle business within Kering, and what you feel about this at this current stage. Thanks very much.
Thanks, Luca, for your questions, and especially for the first one, because at this stage, probably too early to assess, in the long run, what would be the behavior of the wealthiest Chinese customers. What we know at this stage is that they are buying less in Hong Kong, they are buying less in Southeast Asia. They are buying probably more, as you mentioned, in Korea and Japan, but mostly probably in Europe, in the main cities in Europe. I think it's very difficult to gauge this precisely, considering also that the consumption environment with the Chinese customers is still quite muted. What is fair also is to consider that in Hong Kong, besides the decline of traffic, as I mentioned, and perhaps due to the regulation on the tour operator, perhaps we have also the impact of a less qualitative traffic in Hong Kong.
I think at this stage, it's very early to say that, but I think one of the impacts we see on the hard luxury side in Hong Kong is partly driven by the fact that the wealthiest Chinese are buying not anymore in Hong Kong. Concerning the handbags, I think we made it very clear that the strategy was not to tap again or to come back to the more affordable segment. I think that now, as presented in the slide, we have the assortment in terms of price points and styles we want to have in the handbag category. There is no plan to launch some handbag with a lower entry price. We would rather consider, as already mentioned, to propose some more aspirational product in some other categories in the Gucci stores.
I think that one of the demonstration of this is the very solid increase of sales in some categories like jeans, silk, and shoes. This is the way we can address more aspirational customers. No plan at this stage to come back in the more affordable segment in handbags. Jean-François?
Regarding the CEO in China, we are in the final phase of appointment. Now about the combination of luxury brands together with sport and lifestyle brands within our group. I think that we are in the same situation as the Volkswagen Group, for instance, which combines SEAT together with Bentley. They manufacture cars, but they have luxury cars on the one side and, I would say, enterprise cars on the other side. In our group, we have brands that share the same value chain and with differences in the magnitude of those various elements. Indeed, this is the same value chain. Also, what we have implemented gradually is some sharing of experiences and knowhow, particularly in merchandising, also design, also fabrics. For instance, in Milan, we have a material innovation lab which analyzes and experiment new fabrics with a specific focus on sustainability.
This is primarily meant for luxury, but also it is used by our sport and lifestyle brands. That's why, in fact, our sport and lifestyle brands do benefit from the presence of the luxury brands together with them in the group.
Perfect. Thank you very much indeed. Just for clarity's sake, when I was thinking about accessible priced handbags, I wasn't implying that you would go back to that space with your own brands, but I was just wondering whether there could be an interest down the road in acquiring an M&A of brands in that space, if at all. Although I understand that this is probably not the case.
That's not the case. Absolutely.
Okay. Thanks very much indeed. Thank you.
Thank you. Hello?
As a reminder, to ask a question, please press star one on your telephone keypad. We'll pause just for a moment to allow everyone to signal. As a reminder, ladies and gentlemen, please press star one on your telephone keypad to ask a question. We will now take our next question from John Guy of Berenberg. Please go ahead.
Thanks very much. Good evening, gentlemen. A few questions from me, please. Jean-François, could you just confirm, I think you mentioned in the second half for Gucci, your expectations of growth around, I think, 4%-6%. I just wanted to clarify that was for the second half or what you're seeing so far within the third quarter. Certainly, with regards to the comp base in the second half, it's significantly softer. I think you mentioned this gradual trend rolling through into the second half of a more normalized wholesale environment. You should see a pretty strong technical uplift from those two drivers, notwithstanding any improvement within the retail division. If you are talking about 4%-6%, that still seems reasonably light within that backdrop. I just wanted to confirm that.
My second question was with regards to the number of outstanding retail stores at Gucci you have outside the Frida format, the Frida one format, your expectation and timeline around having all of those done in a consistent format. My third question is just around Gucci's bag price mix evolution in the second quarter. I think there were comments around the first quarter talking about a mid-teens price mix uplift, I wanted just to check that was running consistently into the second quarter. Also, what you expect to see within your accessories line. I think that this is an area where we see on our pricing database some pretty inconsistent price mixes across your accessories. The scale of the opportunity there, please. Thank you very much.
Okay. I can confirm that the bracket of growth rate that I mentioned was meant for the second half of this year.
Regarding the store footprint and the implementation of the Frida concept, as of the end of H1, 58% of Gucci store network was carrying the new store concept. 10 stores have been refurbished or opened under the new format during the second quarter, 18 during the first half. By year-end 2014, it is expected that 63% of the store network will carry the new format, bringing the total number of refurbished to approximately 40 refurbishments over the year. Again, just as a reminder, when we talk about Frida concept, of course this concept can also evolve a little bit to address certain feedback we can have from the customers, especially some local specificities we need to address.
Regarding the price evolution of the handbags and more generally, the Gucci products. What we can say is, of course, as you perfectly know, part of the average price increase in the past was driven mainly by product mix, two-thirds of this and one-third due to pure price increase. At the beginning of the Q2 2014, Gucci started introducing the fall/winter 2014 collection, for which no pure price increases have been applied. Gucci's main objective for this collection was to maintain the same price positioning of spring/summer 2014, consolidating the increases of the previous season. What we see is more price increases in the luggage category, also in the small leather goods category, where we are making the efforts to upgrade the brand and also to have a more balanced offer between logo and non-logo, as we did in the past in handbags.
What I expect for the handbag is a softer evolution in terms of average selling price, and more an effort put on the other categories, and especially the small leather goods and luggage.
Okay, great. Just to, I guess, develop your comment around the Frida concept, is that with reference to, I think, 80 stores where you've got a slightly differentiated merchandising offering at the moment in terms of trialing different formats within the Frida concept? Maybe could you just comment around how that's evolving and if you're going to continue to actually roll that out? If I could just ask one more just around Hong Kong and the weakness that you're seeing. Has any of this got to do with, I know it's very difficult to try and sort of quantify this relatively early stage, but do you think there's any significant weakness on the back of Occupy at the moment, which seems to certainly have had a relatively negative impact from a wholesale sell-in perspective? Thanks.
Concerning the Frida concept, we must make the distinction between the complete stock concept and perhaps the use of different fabrics or the use of different materials within the store. When I mentioned the evolution was more about the fact that we tried also to fine-tune the concept country by country or region by region, introducing some new colors or type of wood, but still under the Frida concept. What you mentioned and you are referring to is more about the visual display and the fact that we had made different clusters of stores in order to address properly the specific clientele of the store. We have a program that was set up by the merchandising centrally at Gucci to have a dedicated visual display season after season or period after period to clearly address the client's expectations.
We must say that we are quite happy with the development of that concept of a very dedicated visual display, and it was introduced at the time of the Bright Diamanté introduction. So far so good, I would say, concerning this principle of a specific visual display. Concerning the question about Hong Kong, I think it's very difficult, as you mentioned, to know exactly at this stage. It's probably too early. I think that clearly we have a global economical and political environment that puts some pressure on Hong Kong. We will see. I think we will be in a position to analyze this more precisely in the coming weeks.
Fantastic. Many thanks.
Ladies and gentlemen, if you have previously signaled to ask a question, please press star one on your telephone keypad to queue. We'll pause just for a moment. We will now take our next question from Antoine Belge of HSBC. Please go ahead.
Yes. Good evening. Antoine Belge at HSBC. A couple of questions. First of all, on the acquisition of Nardin, could you provide the EBITDA number on which you based your 30x multiple, please? Maybe share with us some kind of sales evolution over the last, I don't know, three or five years. Has it been a brand that grows all along or went through soft patches or whatever? Second question relates to your expectation of a 4%-6% increase at Gucci. Can you explain what type of expectation you've got for wholesale? Because if I remember correctly, I think earlier in the year, you said that wholesale over full year would be down low single digits, and it was already down 16% in the first half. Does it mean that you're expecting actually wholesale to be positive over the full year?
My third question relates actually to Sergio Rossi. It's not the first time that you mentioned that Sergio Rossi is below your own expectations. What are the issues at Sergio Rossi? Since, again, you've been complaining about the brand for quite a while, what's the rationale for keeping the brand within your portfolio? Maybe also, if you could mention if your stake in Puma was changed in the first half. Thank you.
Okay. The multiple I mentioned applies to the EBITDA of 2013, we do not disclose the figure.
Also in my speech, I mentioned that it is now enjoyed sound growth in the past years, particularly with the launch of new products, very innovative, particularly based on silicon. Again, I think that we have in our pipeline new innovation for at least four years to come, which make us confident that we will post growth for this brand.
I will come back to the different comments I heard or the questions I heard about the trends for H2. To remind that the negative wholesale trend in Q1 and Q2 encompasses the comparison basis in H1 2013 that still included some accounts now closed in Europe, as well as a lot of operations that have been brought back in Q2, Q3, and Q1 this year, like Korea, Canada, Russia. Mechanically, the trend is poised to improve gradually quarter after quarter, provided we don't selectively and opportunistically contemplate any further buyback opportunity in the coming quarters. At the end of the day, probably for the second half, the trend in wholesale should be more or less flattish. Concerning globally, the trends for H2 globally, as you know, we never provide formal quantified guidance.
It's hard to predict if consumers' mood and macroeconomic environment will improve in some regions. This being said, and coming back to all the comments we made about the collections and all the initiatives taken with the new managers in Asia, we are confident that Gucci can deliver in H2 a positive comparable growth. It's unrealistic at this stage to expect this growth. It's realistic, rather, to expect this growth to be low single digit and especially with an improvement focused on the Q4 of the H2.
Sorry, I'm getting slightly disturbed. It's not 4 to 6%, but it's low single digits.
I'm talking about the positive comparable growth on the like-for-like business.
Okay.
If you have the impact of the extension of the stores, mainly the impact of the openings in 2013, which are less comparable, then you reach the amount mentioned by Jean-François.
Okay. Which means that in retail, actually, you would be closer to six to eight.
Antoine, I just want to emphasize that I didn't mention this figure. It was Thomas who mentioned this figure. I confirm that this figure was sensible. As you know, we never give any type of guidance.
Okay.
This is not our figure. This is only something that we guided on your figures. Okay, coming back to Sergio Rossi. Indeed, we face issues, both from a revenue perspective but also a profitability perspective. We are quite determined to take actions in a very wide range of options. This is something that we have been addressing and we will continue to do in the coming months. As to Puma, the share in Puma's stock has not changed.
Okay. Sorry, on this, Nardin, but you have to understand that you don't want to give the acquisition price, but in terms of profitability, I don't know, was the EBITDA margin around 10%, 15%, 20%? I mean, some kind of broad estimates would be welcome. Thank you.
I would say that it's a margin that is comparable to the best-in-class in this industry.
Thank you.
Thank you. We will now take our next question from Paul Fernandez with Morgan Stanley. Please go ahead.
Good evening. Thank you for taking my question. I noticed you mentioned that the men's business was a driver at several of the brands. Could you comment broadly on what the drivers were and give us some color? Also could you comment, is it a driver in most of the brands, in most of the regions? Was it just mentioned that the two brands, I think it was Bottega and Saint Laurent?
First of all, you know that in the emerging countries, the balance between male shoppers and female shoppers is not totally comparable to the one we have in the more mature countries. One of the driver was clearly the way of the men in the emerging countries buying some luxury goods. Also, we see an increase of the male buyers in the more mature countries, especially in the U.S. Progressively, we see that the more the luxury market or the luxury brands are penetrating the U.S., we have more and more men buyers. At the end of the day, this is clearly a category performing very well in mostly all the regions. Also in all the brands. We mentioned Bottega Veneta and Saint Laurent because this category was probably underdeveloped, so this is there that we see the most impressive expansion.
We can say that globally, that's true also at Gucci level. In all brands, we have an increase of the sales in the men's category.
Since it's underdeveloped longer term, you see it as a greater percentage of the business keep continuing to grow?
Absolutely. This is an opportunity to say for almost all our brands. Clearly, the development of Bottega Veneta in the U.S., we have already mentioned, will be partly driven also by the men's category, whether in the shoe category or in the ready-to-wear category. We have many initiatives in almost all the brands to push this men's category. One of the most iconic brand in that category is McQueen, in which we have a men category performing very well now for years, but we can still develop. Again, at Balenciaga, this is also a category which could be further developed, especially in the sneakers and in the shoes. We are working on this, and that's the reason why we have opened a men's boutique in New York, in Mercer Street, dedicated to the men's category.
Interesting. Thank you very much, and best of luck.
Thank you. Finally, we will take our last question from Hermine de Bentzmann of Raymond James. Please go ahead.
Hi, good evening. I have three quick questions, please. The first one on Gucci, can you give us the weight of the Chinese and Japanese clientele in H1? The second question will be on store opening. How many store opening are you planning for men luxury brand in H2? Lastly, what kind of tax rate can we expect in full year? Thank you very much.
For Gucci, the Chinese customer globally, so in mainland China or with the tourist, the mainland Chinese are representing 34% of the sales of Gucci, and 36% at Bottega. If you add the other Chinese, you add 3% at Gucci and 9% at Bottega Veneta. The Japanese are representing something like 11% at Gucci and 17% in Bottega Veneta. This is the share of the Chinese and Japanese with the two main brands. Of course, our other brands are less exposed at this stage of their development to the Asian clientele, except, of course, Saint Laurent, which is a brand very demanded and which is very hot in Japan for many years. Now Saint Laurent is developing very well in China with a very rapid expansion, and it's partly the explanation also of the growth of the brand this year.
As we got the store opening, as you will have noticed, we have rather consolidated our store footprint during the H1. I would mention to specify that at Gucci we have, for example, the impact of the five stores put back in Russia, plus some openings of new corners for Gucci watches. Small corners, so that at the end of the day, it's rather a decline in terms of number of stores at Gucci. We have no plan to speed up or to have a higher pace of store opening during the H2. The pattern that we have in the H1 in terms of store opening should be more or less the same during the H2.
Rather a stabilization this year, it's partly also the rationale for keeping the CapEx budgets more or less at the same level with a reallocation of the CapEx to the refurbishment, including at Saint Laurent. After a year of massive investments last year in store openings, we are focused more on the refurbishment. Concerning the tax rate, I think that you should look primarily to the recurring tax rate, which is the most representative one because you have an impact this semester due to the net gain in connection with the sale of the building in New York. The recurring tax rate is, I think, a good indication of what is the average tax rate of the group for now several quarters or several semesters. We don't anticipate major changes in terms of tax rate for the second half.
Thank you very much.
All right. Thank you all for participating to this call. Claire and Edouard are available to answer any questions you may still have. We will talk again at the end of October for the release of our Q3 sales figures. In the meantime, I wish you a good evening and a great summer. Good night.
Thank you. Bye.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.